Updated on 09.16.14

Figuring Out A Debt Strategy After The Home Purchase

Trent Hamm

My wife and I have spent extensive time thinking about a plan for repaying all of our debts after we move into the home. Our goal is to be debt free (including the mortgage) in fifteen years – a goal that my wife heavily believes in. For me, although I don’t believe it maximizes our dollar, I do believe that it’s a great goal that will enable us to be debt free when we reach our 40s and we start focusing on paying for our children’s college education.

The Basic Debt Snowball

Our basic debt snowball is pretty straightforward. Our only debts outstanding are three student loan debts, two of which have an interest rate higher than our home loan and one with a very low locked-in rate lower than our home loan. So, our first goal will be to pay off the two higher ones, followed by the mortgage, followed by the smaller one. With focus, the two higher ones should be paid off in a year or so – this will be easier because we’re no longer saving every spare dime for the down payment and moving expenses.

So, our first draft of the plan is:

Pay off student loan debt #1
Pay off student loan debt #2
Pay off mortgage
Pay off student loan debt #3

Unfortunately, it’s not so simple…

Issue #1: Emergency Fund

Right now, we have about three months’ worth of my salary in an emergency fund. I would like to have eighteen months’ worth of my salary – or about twelve months worth of our combined salary – in that emergency fund. To me, this is a very high priority, higher even than the debt snowball. I don’t wish for a bad situation to derail my family’s plans – right now, I have a toddler and I have a baby due in three months, and my children and my wife are the center of my life, period. So, an emergency fund is an even higher priority than the debts.

So where are we at?

Build a twelve month emergency fund
Pay off student loan debt #1
Pay off student loan debt #2
Pay off mortgage
Pay off student loan debt #3

But wait, there’s more…

Issue #2: Automobiles

My wife and I both have cars between five and ten years of age that are fully paid for. We both plan on driving our automobiles until they literally die on the road or another social change makes a new one necessary (like a possible third child…). We anticipate needing one new vehicle in three years and another one in five years. We plan on buying well but not luxury – our tentative plan is currently to buy a minivan and a sedan (yes, we’re about as boring as possible). We’re willing to pay more for reliability but we don’t need most of the hallmarks of quality – these will be family vehicles, like a Honda Odyssey and the like.

So how will we pay for these? I would prefer to pay cash for them if at all possible, so that basically means if I start making payments on them now, we can afford to outright buy them in three years. To ballpark it, I looked for prices on late model used versions of the auto models we’re looking at, then worked out a three year payment plan on one and a five year plan on the other using an online loan calcuator (my “payments” now are lower than they would be if we bought it on a payment plan, because I’m not paying interest and the savings account is earning interest). Those features add together to trump any of our current debts and also even to trump our large emergency fund buildup.

So, here’s the real savings plan for now:

Car fund #1 ($501 a month gets us $20K in an HSBC Direct account in three years)
Car fund #2 ($289 a month gets us $20K in an HSBC Direct account in five years)
Build a twelve month emergency fund (this basically catches all the extra for the next few years)
Pay off student loan debt #1
Pay off student loan debt #2
Pay off mortgage
Pay off student loan debt #3

Some Thoughts

It’s kind of disappointing that we’re not immediately paying off debt. However, in the case of the car funds, we effectively are paying off debt – without those funds, we wouldn’t have the ability to just write a check and replace our old, worn-out automobiles. The $20K estimate might be high for a late-model used, but I’d far rather have too much than not enough.

What about the “tight budget” effect? I’m not really worried about it, to tell you the truth – I like it if the budget is tight right now because it encourages me to be careful and frugal. I don’t stay up at night worrying about it because I know that we do have cash, but I also know that there’s only a small amount of free spending money right now, so I don’t buy frivolous stuff.

Why do this? By building a master plan like this and carefully planning ahead, it’s going to make our financial situation as our kids grow up much better. Right now, we can quite easily make frugal choices – our children will be quite young and won’t have expensive needs. But by laying the framework now, we’ll have a lot more cash freed up in fifteen years when our children are starting to look at college – we’ll have 529s for both of them and no debt at all so that if we make the decision to help more, we can.

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  1. Alex says:

    I strenuously object to this strategy (not to you doing it- you’re obviously free to do whatever you want). Here’s the rub: Putting the vast quantity of your money into low-interest returns will wreck havoc on your wealth accumulation.

    Say you have $76K in an HSBC Direct Account (car funds+emergency funds) earning 5%, what would happen if you put that money into equities, earning an average of 10%? Through the magic of compound interest you would rapidly make enough money to cover any emergency situation even if the market suddenly tanked.

    The point of an emergency fund is to have short-term capital on hand in case it is needed, its not to “protect” on a long-term basis, the bulk of your assets from the fluctuations of the market.

    Student Loans? I assume some of these student loans are federal student loans (which means they come with an ultra-low rate) What rate are you paying on them? It makes no sense to pay off student loans if you could be making far higher even if you put the money in your HSBC account. Why take money out of a 5% HSBC account to pay student loans which are lower than 5%?

  2. Shawn says:

    12-18 months is too much to have in an emergency fund. You should have long-term disability in place and the emergency fund is there to get you through until that gets into place. If you are not disabled long-term you should be able to generate income within 6 months.

  3. viola says:

    To counter Alex, equities that can get you 10% are great. But are they GUARANTEED? It sounds great to say that, but to do it with money you will actually need to live on very soon sounds fairly foolish. The “avoid paying debt if you can get higher returns” really only works if you actually get higher returns. A 5% interest debt when paid is guaranteed 5% return. Equities are of course never guaranteed.

    Emergency funds are for emergencies. You may have doctor bills for instance ON TOP of living expenses.

    I think financial planning is about doing what’s best for you personally. Good for you Trent for at least beating 99% of the people & having a plan!

  4. While I applaud your thought process, I believe this post is mistitled. You’ve outlined a savings and debt strategy; not just a debt strategy.

    That said, have you run the numbers for putting the money you’re earmarking towards cars and student loan #1 into student loan #1, then applying the money for cars and student loan #1 into the car fund? This is assuming that you’re paying more interest on the loan than you’d get from the car fund.

    One of the best ways to save money on cars is to make the old ones last forever. A long-term relationship with a good mechanic can be as much of an asset as a having a good financial planner!

  5. Elaine says:

    I too am curious why 18 months of salary (or even 18 months of living expenses) is necessary. If you’re unable to work for that long shouldn’t you have insurance to cover it? What emergency scenario did you have in mind?

    My emergency fund goal is $1500, and I’m having trouble coming up with a situation where I would genuinely need that much in a hurry. But then I have no dependents, plus socialized health care and employment insurance, so I realize my situation is a bit different :)

  6. Ian says:

    It seems to me that planning to buy 2 $20K cars in the next five years while you have student loan debt at 6+ percent (I’m guessing, based on them being more than your housing loan rate) isn’t the best ordering of priorities. You can buy a nice reliable car for half of that pretty easily.

    Think of it this way: If you didn’t have the student loan debt, and your car died tomorrow, would you take out a loan at that rate to buy a $20K car, or would you make do with something not as nice for $8K? Putting money into savings for an expensive car instead of paying off the debt is no different than taking out debt to buy an expensive car when you don’t have the money for it.

  7. Brian says:

    I’m with Alex on this one. I don’t agree paying cash for a car. You’re going to put almost $800 per month into a savings account for three to five years? Put that $800 into investments and start earning 10% returns immediately. When it comes time to get a new car, you should be able to get a loan for around %5 interest.

    That $40,000 you saved will make $333 per month on returns (assuming 10%), while you’ll pay $83 per month in interest on each car (assuming %5 loan) You’ll net $167 in positive returns, not even including the returns you’ll start to make when you start putting away the money today.

  8. Kevin says:

    Everyone who is saying to invest the money and make 10% is operating on the assumption the stock market will continue to sustain a 10% return. Sure its proven over an extended period of time to do this but how quickly everyone forgets the late 90’s and early 2000’s. Say you invested in November of 2000 and had an emergency two years later, your investment was worth just over half of what you had originally put in. In my opinion thats not were I would keep my emergency fund.

  9. Amber Yount says:

    Good idea, I too want to come up with a bigger emergency fund before we really start paying off debt, considering last month we had a big business emergency that costs $20k on a credit card…ouch!

  10. A few thoughts, your emergency is way too big. If you’re unfortunately out of commission for more than 6 months, shouldn’t disability insurance be in place? I guess, lay off or firing would be different though, but my assumption would be that you would be able to get a job within 6 months, plus the income from the blog should help a bit.

    Not sure how I feel about saving 800 a month for new cars. I’m not sure where else I would put that money though, because any investments within the 5 year range can be dicey.

  11. NickC says:

    You have $800 a month to throw at savings. OMG!

    I think 18 months is sickening (personally) but you have mentioned the thought of leaving your job and going full-time blogger. If I wanted to do that kind of a move (non-blogger move), I would want a huge cushion to fall back on, too.

    Our society pushes the concept of “debt is ok” as long as you cover your own and make a better interest rate. Hogwash (to me)! Get rid of the debt (and the bondage of someone owning you) and get yourself $1000+ a month to throw where you want.

  12. vh says:

    Okay, eighteen months is a little much…probably twelve months of survival savings will suffice, especially if you can get disability thru’ your employer. But at your age, the likelihood that, should your employer can your a**, you’ll find another job within a year is pretty good. Remember, your spouse could also be looking for better-paying work during that time.

    Car: Figure out what your payments on a new (oldish) car would be. If you can afford that (and you probably can), put that amount into a conservative investment NOW. A credit union’s money market account is federally insured and has a return that’s not great but is better than a hit on the head and a heckuva lot better than a savings account pays. Vanguard’s short-term investment grade bond fund is pretty conservative; doesn’t make you rich but rarely and only briefly loses money, and you can write checks on it. If you can’t get into a credit union, Vanguard also has money market funds; at least one (prime money market) will let you write checks on that, too.

    If you went for a 12-month emergency fund you could reallocate savings to, as NickC suggests, get out from under the debt faster. Debt = bad. Even low-interest student debt, bad. Get rid of it as fast as you can. Then take the $$ you used to service the debt and pay it to yourself.

  13. Brip Blap says:

    Don’t let anyone talk you out of the 18-month emergency fund. I have mine up to 6 months and the peace of mind it has bought me is immeasurable. I’m a consultant and so my work sometimes goes in fits and starts, but having the emergency funds means that when work is slow I can spend time with my family and really enjoy it instead of worrying about how to pay the mortgage. 18 month seems excessive but if you make it to that point you’ll be able to really enjoy your life, which is what it’s all about, after all.

  14. laura k says:

    Is it necessary to own two cars? Could your wife drive you to work and pick you up? (I seem to remember that your commute is quite long, so maybe bundling up the kid[s] twice a day is not practical, but it is something that no one has brought up yet.)

  15. George says:

    I’m also of the view that an “emergency fund” shouldn’t be invested in the stock market. Money for an “emergency” is money that MUST be available when you need it. Stock markets DO fluctuate – we’ve had a bull market for the past few years, and it’s highly likely that the market will undergo some serious fluctuations in the next year or two.

    Trent, your plan makes sense, but your savings goals are probably a bit too large. 18 months is an extremely large emergency fund – 12 months of salary is probably excessive too. $20k for a late-model used vehicle is a very comfortable budget, especially since you haven’t factored the residual value in your existing vehicles. Even a 10+ year old vehicle with lots of miles can fetch a grand or two when sold used, as long as it still runs.

  16. Trent Hamm Trent says:

    Lots of things to comment on here…

    I know the 18 month emergency fund is pretty large, but (1) I have two children under the age of two and we’re going to try for a third soon and (2) I’m considering a move to being a full time blogger. The number of situations that require liquid cash with these two caveats boggles the mind.

    As for the “why not start investing now and making 10% a year,” we’re four years into a bull market and the housing market is soft. These are not days where I feel good about putting in money and expecting it to earn 10% annually over the next few years.

    As for “why two cars,” my wife and I literally work in opposite directions from our home. If I were to make the full time blogging move, we’d look more seriously at a one-car situation, but for now, two is going to have to do.

  17. Kristina says:

    Two $20,000 cars is financially irresponsible when you are still sitting on tons of debt and you have other financial goals. For $10,000 (or less!!) you can get exceptionally nice used Honda Civics or similar cars.

  18. bk says:

    Instead of saving $800+ for car(s), why not pay down your mortgage, thereby ‘earning’ more than what you would earn in a savings account? Then when the time comes to buy the car, you could take a Home Equity Loan with tax deductible interest to pay for it. Have you run numbers to see whether this strategy is preferable?

  19. Murano says:

    I agree about the cars its not a necessity we have saves a big chunk over the past few years by only sticking with the one car and choosing wisely.

  20. Mike Pahl says:

    Stick with your plan. First, you are one of the few out there that actually has one. Second, you need to do what makes sense for you. If you end up saving a ton of money for cars and find you don’t need it then you have extra cash. Saving money is never a bad thing. I am currently saving money for my next vehicle and am strongly considering living a lifestyle where I only use mass transit. If that’s the case I can apply that money to retirement, house fund, etc.

  21. Kevin says:

    Have you ever put two kids in a honda civic? I loved my 97 civic. It was a great car, great mileage, very reliable. Then I had a baby. Strollers don’t fit in the trunk well and theres really not enough room in the back seat for a good car seat for toddlers. Not to mention any other items you might have (groceries etc.)

  22. kim says:

    When I had my first children, twins, all I thought about was a minivan. I was convinced that I needed such a big vehicle to accomidate my family. We bought one and I hated it. No trunk space and lots of wasted space in the seat portion. When the third baby came along, it was a pain to have one child way in the back. We traded in the van for a much more reasonable used dodge intrepid. It fits 3 car seats comfortably accross the back. It has pleanty of leg room for my 6″5″ husband. Best of all it has a HUGE trunk. It was only one year old when we bought it for 12K. I think we are socially conditioned to think that we need a huge vehicle for a normal sized family. Remember when only families with 4 or 5 kids had vans? Do you need it or do you just believe you do because you’ve been conditioned to believe it?

  23. Lisa says:

    I don’t know your numbers for school loans 1&2 but if they are higher than your mortgage interest they must be at 6%+. What about this as an alternative? Pay off school loans 1+2 in a year as stated above and then save for a vehicle for 2&4 years. The debt is gone and you could then use the student loan payment money towards the vehicle fund. Another 2 monkeys off your back and still saving for vehicles in 3/5 years.

  24. Lisa says:

    One more thing, in year 4 of saving for car 2 are you applying the $501 now available (since you are done saving for car 1) to car 2. Not by my calculations. What are the plans for this money? Why not refigure and see if you could pay off school loan 1&2 and save for car 1&2 using the snowball.

  25. Jake Smith says:

    Trent, I love the fact that you have chartered out such a detailed plan for yourself, that can only be good. BUT, here’s my question – should you even think of having a third child given your fiscal situation – you obviously have a ton of debt, and paying for 3 kids’ college education is going to take a LOT of savings. Would it be worth being continuously frugal for 20+ years so that you can have a third kid?

  26. Trent Hamm Trent says:

    Jake: without a doubt, yes.

    Lisa: the money at that point goes further down the list, likely into the emergency fund or possibly into paying off the first student loan.

  27. Tyler says:

    Trent, I like your ideas. I see nothing wrong with the super high Efund. Why? Because having too much is nonsense. The more you have that your not using, the more you can let it work for you, say in a MM account or online savings. Either way, plenty of cash is NOT bad. As for the cars, I’d lower the prices on what you are going to buy. That’s way too much tied up in a car IMO. Not only will that car quickly depreciate, but you’re going to have to pick up one when those die. Get a cheap, reliable used car and make it run – you’ll then have quite a bit of extra money left over for paying down your loans or whatever you want. Either way, Trent, you are ahead of most of Americans with this plan – don’t let the comments derail your goals as your goals are your own and you choose the way you want to live. Keep it up buddy!

  28. Monica says:

    I’m with the people wondering about the two cars. Could neither of you car-pool? Could neither of you bike? Could you purchase a scooter instead of a second car? (I know people who have done that & it saves them a lot of money.) Could neither of you change jobs to a more convenient location? (I personally would take a pay cut to work closer to home.)

  29. Kathryn says:

    I dont’ think this has been mentioned yet…

    We faced a similar (well, related) situation… trying to decide whether to pay down debt or save for an upcoming expense. In the end, my decision was driven by the issue of cash flow. When you partially pay down a installment loan like your student loan, you may owe less but you are still obligated to make the same minimum payments on the debt…and thus you still don’t have any flexibility in allocating that money each month. When you _pay off_ an installment loan, it frees up some of your income/cash flow. I view this freedom from obligation as part of my emergency fund/plan. It means I can get by with less income each month if I need to.

    So…my thought is:
    – IF you can actually close out one (or both) of the student loans in a very short time, you should do that first and then put the extra toward the car savings (snowballing).
    – IF you can only partially pay down the loan before you really need to save for the car, then just set the money aside in whatever savings/investment account is comfortable for you. This way at least the your payments (on the student loans) is known. Probably better than taking on an additional loan later.

    (Or split the difference. Start saving for the 3-year car and pay off one or both loans, then snowball the payments into the 5-year car savings.)

  30. Erika says:

    I find it amusing that people always think it so terrible to have a large emergency fund because it earns a lower interest rate than investing. I say that if you are saving enough for retirement, if your account is at least matching inflation after taxes, and you can meet your financial goals, do what makes you most comfortable. If, for example, someone could meet all those goals by keeping all their money in high interest savings accounts, there is no need to invest; sure, do it if you think its fun or if it would cause you to broaden your goals (have more to give more perhaps), but do not feel bad if you choose not to.

  31. Brian says:

    First of all, this is a great post for many reasons. It gives all of us different ideas about tackling similar debt/savings situations.

    You do have to do what YOU(and your wife) are comfortable with no matter what all of us might say.

    I also think snowballing the loans then applying all of the monthly payments towards ONE car account. If one car breaks down beyond repair, you can use what you have saved to buy a used inexpensive car and start saving for the next one. You would be surprised what you can get cheaply if you look and are willing to settle for something that is only sound transportation and not $20,000 car. If you current cars last, then you will still have saved enough money to pay for the cars you want.

    As for the emergency fund, I do think 6-12 should be adequate, but I would also suggest you postpone the full time blogger move until the part time blogger job is making as much or more than you current job. This should also give you additional income while building your emergency fund and paying down debt/saving for vehicles.

    And one last thing, good insurance is the foundation of any wealth building plan. So if you don’t have sufficient disability and life, I would suggest you get it asap.

  32. Brian says:

    One last thing, emergency funds/short term savings(for the cars) should never be invested in anything other than savings/money markets/cds type of accounts.

    These are savings, NOT investments.

  33. Lauren says:

    I didn’t see anything in here about retirement – you can’t take out a loan for retirement but your kids can get scholarships and student loans for college. I am going to be balancing saving for retirement and paying off student loans and other expenses too. Was wondering what some other people’s strategies are?

  34. Elden says:

    I agree with the not paying that much for cars. You do not need a minivan until the number of people exceed the number of seat belts available.

  35. Bill says:

    1. Pay down the debt. Feel ok with debt that’s making you a better life – education.
    2. Pay your mortgage normally. Did I read that right? You want to pay off the mortgage?
    3. Way too much in HSBC – 3-6 months total for the both of you or some set amount that the return will make the account grow automagically.
    4. Lose the 529 plans for your kids. It would be better to have an investment account at a brokerage with both your and your wife’s name on it called the education account. If your kids need it then use it for their education. If they don’t because of grants, scholarships, etc. then it’s your money or help them start a Roth IRA with it. You owe your kids equality of opportunity and not money for all of them to go to college. You never know what they’ll want to do when they get there. Plus you really need to look at what the 529s do to your financial life when your kids reach that age. There’s more than one way to pay for college, there’s only one way to pay for your retirement.

    Of course, like you say, it’s all personal. :)


  36. Amy says:

    I came to your website via MSN Money and let me just say, I love it. I think that, in general, you have some very good advice – particularly for people like me. All platitudes aside, I’m probably not posting in the right spot, but I wanted to tell you about something. You’re putting your car savings into an HSBC account, probably on a monthly basis. While this is a good idea, here’s another one that might help you – or your readers. I work at a bank (it’s a small midwestern one, not one of the big guys) and one of the things we offer (we’re not unique – it’s just not popular) is a loan secured by a certificate of deposit – a CD secured loan. What this is is a loan – say 15K, where the principal amount that you sign for is deposited immediately into a certificate that is held as collateral. If you can get a rate that is at 5.50% (do some negotiating) then the loan is usually 2.00 to 2.50% above that. While this might seem backwards, if you do the math it works out. Because you are paying the loan back at a monthly installment (your three or five years, depending) you actually spend less in interest than you save. As well, due to the time value of money, you make more money on a lump sum in the certificate than you do with equal installments over the same length of time. This is how I’m saving for my car, and while this type of loan isn’t mainstream, they are available. As well, it helps your credit to have that on there. And, if you run into some unforseen financial difficulties, all you have to do is cash the certificate in – and pay back the loan with the proceeds – and your good to go. Just wanted to share that with you – it’s a lot for some people to wrap their brains around, because it seems backwards, but I thought you might like it.


  37. Frank Kelly says:

    Hi Trent,

    Similar situation here – after my wife and I bought a house we struggled with the following tug-of-war

    1) Pay-down Credit Cards (we used them a bit to buy stuff for the house) @ 6.9%
    2) Pay down HELOC @ 8.25% (tax deductible)
    3) Pay down our Car Loan @ 7.99%


    1) Retirement Savings (401k / Roth)
    2) Education Savings (we have two kids under two – but that’s IT! Well for now). Our local schools are pretty bad so we’ve got to save for private school in addition to college
    3) Our emergency fund was depleted from 6+ months to just under 3 months

    Here’s how we did it
    1) We paid off the credit cards – done deal & no brainer

    2) I set my 401k to 6% (the minimum to get the full match) – fortunately I saved like crazy and invested aggressively before I met my wife. So we’re still on track for $5M by age 65 (assuming history is any judge)

    3) Set our Roths / Coverdells and 529s on minimum monthly investments ($50 a month). Any monetary gifts from family for the kids go towards their 529.

    4) We paid an extra $100 on our HELOC each month – so it’s going down albeit slowly

    5) We’re adding $100 a month to our Emergency fund – it will take years to get it back to where it was but we’ll get there.

    6) Now the focus is on paying off the car loan – using things like tax refunds, bonuses etc.

    Of course as soon as I did that there was an emergency in the family and I racked up $5000 in CC debt to buy plane tickets to Europe. So that hit the emergency fund. But you get knocked down and get back up.

    Overall we might be spread a little thin for other’s tasts – but that’s the plan that makes me worry the least!

    Car should be paid off in 12 months and then we’ll debt snowball into the HELOC.

    We have two cars a 2003 sedan (from my bachelor days) and a 2002 wagon and we plan to drive them into the ground – at least until they are 12+ years old.

    Perhaps once the HELOC is paid off we’ll roll that payment into the emergency fund and then perhaps to save for a Car. But that’s all far off!

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